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Banking industry urged to innovate

By Yu Ran in Shanghai | China Daily USA | Updated: 2016-11-25 11:23

The Chinese and global banking industry need to be digitalized and customer-oriented if they want to regain the trust of their customers, revealed new reports by McKinsey.

By comprehensively analyzing the challenges and opportunities facing the global banking industry, the two reports - one detailed the Chinese perspective and the other featured a global viewpoint - each comprised in-depth analysis on how the banking industry will develop in the future.

According to the Global Banking Annual Report 2016, the global banking industry continued to witness slow recovery of return on equity (ROE) since the onset of the 2008 financial crisis, with ROE stabilizing at 9.5 percent in 2014. However, the industry's gross profits had still dipped.

In 2013 and 2014, the gross profit margins that covered bank interest margins and gross profit margins under service fees dragged ROE down by 185 basis points, pressuring banks to drastically cut their costs.

Although most banks believe that the gradual pickup of bank interest margins will shore up their profits, such a cyclical bounce reveals the most fundamental challenge that the industry is facing today - banks are losing customers they usually depend on for survival in this digital era.

Banking industry urged to innovate

"Banks need to strengthen digitization in multiple ways, like redeveloping the end-to-end process, building an agile organization and setting up an ecosystem for financial technology start-ups to win customers back," said Qu Xiangjun, senior partner at McKinsey.

The report also provides three suggestions to how banks should embrace digitization in the future - focus on customers, build up digital capabilities and set up an organizational structure to support innovation and digital transformation.

The report that featured a China perspective, titled What is the Future of China's Banking Industry - Double-track Strategy, points out that the country's banking sector has become the core driver of value creation in the global banking scene in the past decade, with profits rising from 5 percent in 2005 to 25 percent in 2014.

However, the industry's growth rate had slowed down significantly between 2012 and 2014 to just 8 percent, a stark contrast to the 30 percent compound annual growth rate experienced from 2005 to 2012.

In addition to the effects of the economic slowdown and the escalation of asset risks, interest rate marketization and Internet finance are rapidly squeezing the revenues of China's banking industry. The report stated that the industry's ROE dropped from 21 percent in the first quarter of 2013 to 15.16 percent in the second quarter of 2016.

Nevertheless, opportunities and challenges often coexist. The fast growth of new financial technology such as big data, cloud computing, blockchain and artificial intelligence offer a strong boost to strengthening digital business capability and customer experience, the report said.

Qu pointed out that since China's macro-economy and financial industry are currently undergoing a transformation, the country's banking industry could consider the following: optimizing balance sheets, expanding corporate business, strengthening financial market business, developing retail banking, enhancing Internet finance, strengthening asset management and conducting M&As at a proper timing.

With regard to the development cases of more than 30 global leading banks, the report proposes a double-track strategy of transformation and innovation based on market trends and industry developments in China - on one hand, efforts should be made for customer-centric transformation of traditional business, and on the other hand, the operation of digital business should be strongly driven by technology and data.

"The digital era for China's banking industry has arrived," said Han Feng, associate partner at McKinsey. "We believe that the future winners will be those who take action quickly and are persistent in pushing ahead with the transformation of traditional businesses."

yuran@chinadaily.com.cn

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